My Money Is On This Hot Medical Stock

Today I'm going to tell you about a medical company that, within the next two months, I'll be buying into with $4,000 of my own money. I'm so confident that my pick will outperform the market that if I sell any shares within the next three years, I'll donate $100 to charity.

No Pepsi to their CokeFounding Fool David Gardner loves to look for companies that don't -- as he puts it -- have "a Pepsi to their Coke."

What does David mean by this? He means that he loves finding companies that are doing things that no one else is doing. Right now, Intuitive Surgical has that competitive advantage.

Sure, there are plenty of other medical companies out there to invest in. Johnson & Johnson (NYSE: JNJ) is the closest thing to a health-care conglomerate out there, and it's surely a safe bet for your investment dollars. Stryker (NYSE: SYK) would be a solid place for your money as well, since its medical implants and equipment business is doing well enough to enable it to pay a solid 1.2% dividend. Neither of these companies, though, competes with Intuitive.

The closest thing to direct competition is probably MAKO Surgical (Nasdaq: MAKO) , which has developed a robotic arm solution for knee and hip replacements. But even MAKO does not focus on the same procedures as Intuitive's da Vinci robot, which can perform urological, gynecological, cardiothoracic, and head and neck surgeries.

Essentially, Intuitive's main competition comes from traditional surgery. And with its ability to perform surgeries that are less invasive than manual surgery, the da Vinci is becoming the option of choice for patients.

A profitable modelIf you are a male and turned 18 during the late '90s, you may have received a Mach 3 razor in the mail on your birthday. I know I did, and after trying it, I was a lifetime customer. Gillette made its money off my continued purchase of those expensive razor blades.

Several companies have copied this "razor and blades" model successfully. Those who are in the business of producing ink printers are a textbook example, giving the printer away for basically nothing, while charging high fees for the ink cartridges.

In less dramatic fashion, Intuitive has taken this model and applied it to the medical field. Its da Vinci robots are still expensive on an absolute basis (more than $1 million), but continued orders for parts and maintenance on these machines really drives Intuitive's profits.

The more doctors learn how to use the machines, the more popular the procedures become, which leads to even more orders for reusable parts. Investors in Intuitive's stock, therefore, want to keep a close eye on both the number of new da Vincis ordered, but also the number of procedures performed.

Financial fortitudeIntuitive's cash on hand has been growing steadily, up 13% since the beginning of the year to $1.8 billion. The company was also able to eliminate all of its long-term debt at the end of 2010.

Perhaps most importantly, for a growing company that must invest heavily in research and development, free cash flow has been growing at a healthy clip. From the end of 2009 to the end of 2010, free cash flow grew by 30% to top out at $432 million.

A balance sheet like this tells me that the company will be able to fund its future growth from its own cash flows instead of needing to use debt -- definitely a positive sign for a company that already has so much going for it.

Foolish takeawayThis is the eighth article in a series that I'm writing about my retirement portfolio, which I'm dubbing "The Cheesehead Portfolio" in honor of my home state of Wisconsin. If you'd like to see my first seven selections for the portfolio, check them out below.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Intuitive has a great future. But it is also very expensive with about a 40 P/E.

Brian, how about some analysis of your expected growth rate over the next 5 years that justifies paying so much for it. If it is growing 20% per year and the PE drops to 25 in 4 years, the return over the next 4 years would not be stellar.

I have had this stock since its IPO. Now living off of it, lightening up my holdings. Will probably sell you your $4k worth...but love the company.

I'm thoroughly jealous that you were in starting at the IPO. In terms of analysis about the future, I'm not sure ISRG is the type of stock I'd do that type of analysis on. As David Gardner would say, this company has "multiple futures"--meaning that are about 100 different ways this company could go (different procedures, more procedures, international expansion, etc), and trying to say that I can guess which one of those might take off would be a fool's (small f) errand.

WHEN I PICK A STOCK I DON'T SEE A PLACE ANYWHERE TO LET YOU KNOW, I LITERALLY DON'T KNOW HOW TO LET YOU KNOW WHAT I AM INTERESTED IN BESIDE (PSMT) OR A PLACE TO LET YOU KNOW IF I WANTED TO REMOVE THE PSMT.

PLEASE TELL ME WHERE I CAN LET YOU KNOW WHAT I AM INTERESTED IN, I SEE NOTHING TO CLICK ON AS I READ YOUR REPORTS.

Sending report...

Today's Market

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!